I watched the new John Oliver the other day, S11E15, June 16 2024, "Trump's Second Term". And I watched it a second time.
He ran a clip from a promotional video for Project 2025, a conservative manifesto I guess you'd call it. The line in the video that caught my ear was this:
"... to end Washington's bureaucracy and restore American prosperity..."
as if ending the bureaucracy will restore prosperity.
It was the word "prosperity" that got my attention. If you're talking prosperity, you're talking about economic performance. You're talking about the economy.
These Project 25 guys, they think they know how
to fix the economy. But it sounds like they are still thinking what
Reagan thought:
After 40 years, these people have learned nothing. Reagan was wrong about why economic growth is slow.
Growth is slow because we have too much private debt.
Hey, we don't want the government to grow, right? We want the private sector to grow. That's where the money is, and the jobs and all. So the Project 25 guys want to "end Washington's bureaucracy" and "reduce the growth of government". But other people say government should spend more, to help the private sector grow. The two sides couldn't be more at odds.
As these other people often point out, Reagan grew the federal debt. But if you look at the debt of all US sectors, or of domestic non-financial sectors, or of the private non-financial sector, or of households alone, you'll notice that debt growth slowed in the mid-1980s, and slowed again around 2008 due to the financial crisis of that time.
And if you look closely at household debt,
Graph #1: US Household Debt, 1946-1980 |
- you will see it slowing from 1946 to 1955 (the line curves downward),
- running at a constant rate from 1955 to 1965 (the line runs straight), and
- slowing down from 1965 to 1970 (the line curves down relative to 1955-65).
So there was also a slowdown of debt growth in the mid-60s, at least for household debt.
It is all these slowings of debt growth that have slowed our economy. Slower growth of debt means a slower increase in borrowing and spending -- and a slower increase in spending is pretty closely tied to slower economic growth.
Also, the lines on the FRED graphs only go up, which means our debt is always increasing. Maybe increasing faster sometimes and slower at other times, but always increasing. So debt service is also always increasing, at least in the big picture. Increases in debt service take money away from current spending, and therefore contribute to making our economy run more slowly.
I attribute the slow growth of our economy entirely to our accumulated debt. Most people ignore that line of thought. I will settle on a compromise if you will, and say accumulated debt and other factors have combined to slow our economy.
In the latter 1960s debt growth slowed, and in the mid-80s, and again after 2008. Three warnings, the economy has given us. Three warning we have ignored. We're not too bright, are we.
Speaking of which, the Project 25 guys seem to think that cutting back on government bureaucracy (and on government spending and government debt, I presume) will lead us to "prosperity". Their word: prosperity.
It's funny, you know, there is a connection between government debt and prosperity. But that connection does not require us to reduce government debt. Nor does it require us to increase government debt. It requires that private debt be low enough (relative to government debt) that private debt can grow fast enough that the economy grows at the rate that we want.
It requires that private debt be low enough (relative to government debt) that private debt can grow fast enough that the economy grows at the rate we want.
When I Google times of US prosperity, three periods come up: the "Roaring '20s", the 1947-1973 "golden age", and the "new economy" of the mid-to-latter 1990s. All three of those periods of prosperity were times when private debt was increasing relative to public debt:
The Tides of Prosperity (Click image for a less cluttered view) |
The other times, when private debt was falling relative to public debt, are not times noted for prosperity.
It's not that we have to increase the federal debt or reduce it. It's not that we have to increase or reduce private debt. What we have to do is coordinate the two measures of debt.
When private debt gets too high, relative to public debt, prosperity cannot continue. The problem (as I see it) is that excessive financial cost hinders growth. I don't know how economists have missed that detail, but it seems they have.
When private debt gets low enough, prosperity
is able to resume. When it does, it seems to become self-supporting.
But the growth of private debt always out-paces the growth of our
economy. And the federal government tends to use times of prosperity to
minimize its financial obligations. So the private-to-public debt ratio
rises until prosperity can no longer be sustained.
When private-sector financial cost becomes excessive, prosperity fades.
One
thing that does not show up on the Prosperity graph is the growth of
debt. Debt only increases. The private-to-public debt ratio sometimes
rises and sometimes falls, but debt only increases.
Suppose that we want prosperity, but we also want the federal debt to be less than it is. Okay, then we have to do something to make private-sector debt less than it is. And private-sector debt has to decrease faster than federal debt, to bring the ratio down until prosperity resumes.
So we have to bring private-sector debt down. And that is difficult to do.
It is difficult to do because our policies promote the use of credit. Because of policy, the use of credit grows fast, unnaturally fast. And the use of credit creates debt, so our debt also grows unnaturally fast. We have to come up with policies that encourage and accelerate the repayment of private-sector debt.
We have policies that encourage credit use and the growth of debt. To offset the effect of those policies, we need policies that encourage the repayment of debt. Such policies will lead to prosperity and, if we do it right, to long-term prosperity.
You heard it here first.